CONSOLIDATED ANNUAL REPORT OF CYFROWY POLSAT S.A. CAPITAL GROUP FOR THE FINANCIAL YEAR ENDED DECEMBER 31, 2012 Place and date of publication: Warsaw, March 12, 2013
Content of the annual report: Letter of the President of the Management Board Management Board s report on the activities of Cyfrowy Polsat S.A. Capital Group in the financial year ended December 31, 2012 Management Board s representations Opinion of the independent auditor Consolidated Financial Statements for the year ended December 31, 2012 Interim Condensed Consolidated Financial Statements for the 3 and 12 Months Ended December 31, 2012 (unaudited) 2
Ladies and Gentlemen, It is my great pleasure to present to you the 2012 Annual Report of the Cyfrowy Polsat Group. This past year, we pursued both organic growth and strategic acquisitions, while progressing a number of projects that helped us consistently implement Group growth strategy. We focused our entire effort on solidifying our leading position in multimedia entertainment in Poland and in the market for pay television and television broadcasting, as well as on persistently expanding our capabilities in telecommunications and online services. That we turned yet another year of our operations into a success was confirmed by the Group's operating and financial results. Subscriptions to pay television rose to 3.57 million, with the number of broadband internet and mobile telephony users increasing to 150 and 145 thousand, respectively. Our other business segment also delivered as expected. POLSAT, our flagship station, was a leader in audience ratings with a 15.7% market share, with the audience share of our thematic channels advancing by 11%, to 4.8%. 2012 also saw our share in the TV advertising and sponsorship market rise to 23.2% thanks to a well-rounded programme schedule and optimum investments in programme content, with the related revenue markedly outperforming the rest of the market. We are also very satisfied with the Group's consolidated financial performance. In 2012, our total consolidated revenue grew by 17.4%, to PLN 2.778 billion, with net profit standing at PLN 598 million. To ensure an increasingly high level of customer satisfaction, we regularly expanded our pay TV services to include new channels and products. Effectively bundling our products and services we give our subscribers even more value for money. We provided viewers with access to pay-per-view sporting events, contributing to the increased popularity of the service on the domestic market. Building on the success of our VOD Home Video Rental and catch-up TV services, our Online Entertainment zone was significantly expanded to offer viewers a one-stop-shop for programme re-runs, online channels, and ipla, HBO GO and FilmBox live services. We launched a cross-promotion programme with the Plus mobile network, as part of which we cross-sell services to multiply benefits for subscribers of both operators. In 2012, we also achieved expected synergies in the areas of technology, marketing, products and back-office between Cyfrowy Polsat and Telewizja Polsat. It was also the year that our new TV Mobilna, PPV, VOD, Multiroom HD and ipla services gained in importance. In the past year, Cyfrowy Polsat also managed to considerably bolster its presence in the market for online services. We acquired a 100% interest in the companies that run ipla, Poland's leading online video service. Ipla provides linear access to tens of TV channels, HD live broadcasts, and the largest TV-on-demand library in Poland, containing thousands of TV series episodes, programmes and major sporting events. Ipla television services are brought to users of PCs, smartphones, tablets, Smart TV-supporting television sets, pay TV, set-top boxes and consoles, via dedicated applications. According to the latest research, ipla has an average of 2.3 million active users. Another advance towards growth in the online segment was the launch of muzo, a digital music streaming service. Soon, muzo library will comprise five million audio tracks appealing to the music tastes of nearly 90% of Poland's population. The current muzo offering features the most popular tracks across all music genres, which have been licensed from EMI, Magic Records, SONY Music, Universal Music, and other music publishers. To ensure that our services can be delivered through any new technology and device, we launched the DVB-T-based TV Mobilna. We paved the way for its launch a year earlier when we acquired INFO-TV-FM, a company allocated frequencies that are appropriate to supporting mobile TV services based on terrestrial digital broadcasting technology. This new service is available to users of traditional set-top boxes and television sets, as well as mobile devices, which are gaining in popularity. In October last year our wireless broadband service, supported by LTE, the world's fastest and most advanced technology, saw a speed increase of up to 150 Mb/s. We also managed to extend LTE coverage to 50% of the country's population. To cater to changing consumer needs and market trends, we also broadened our internet offering to include new mobile devices computers, tablets, modems and routers. We also launched HALO, a proprietary instant messenger. Our set-top box manufacturing plant was subject to continuous improvement. In 2012, three new types of set-top boxes rolled off the production line, including the HD-3000 and HD-6000 for satellite television services and T-HD 1000 for terrestrial digital television services. To date, we have manufactured more than four million set-top boxes. Our long-term objectives continue to be stable growth, remaining at the forefront of the multimedia entertainment and pay TV markets, improved performance in the telecommunications segment, capturing a loyal audience for the Telewizja Polsat channels, and as a result, securing an ample share in the TV advertising market. As was previously announced, we plan to 3
develop innovative content distribution channels for consumers to freely choose between the technologies and devices that can be used to receive our television services. In the long term, we expect the channels to contribute to increasing the number of our service users, our ARPU and customer loyalty. Successful delivery of said objectives, combined with effective financial management, will go a long way toward creating value for our shareholders. Yours sincerely Dominik Libicki President of the Management Board, Cyfrowy Polsat S.A. 4
MANAGEMENT BOARD S REPORT ON ACTIVITIES OF CYFROWY POLSAT S.A. CAPITAL GROUP IN THE FINANCIAL YEAR ENDED DECEMBER 31, 2012 5
Table of content Item 1. Introduction... 8 Item 2. Currency presentation and exchange rate information... 11 Item 3. Selected financial data... 12 Item 4. Presentation of Cyfrowy Polsat S.A. Capital Group... 14 Item 4.1. General information about our Capital Group... 14 Item 4.2. Organizational structure of the Capital Group... 16 Item 4.3. Changes to the principle rules of management of our Company and the Capital Group... 18 Item 4.4. Strategy, market opportunities and comparative advantage of the Capital Group... 18 Item 4.4.1. Group strategy... 18 Item 4.4.2. Market opportunities... 20 Item 4.4.3. Competitive advantage... 21 Item 4.5. Retail business segment... 24 Item 4.5.1. Market overview... 24 Item 4.5.1.1. Pay-TV market... 24 Item 4.5.1.2. Internet access market... 26 Item 4.5.1.3. Mobile telephony market... 27 Item 4.5.1.4. Multi-play services market... 28 Item 4.5.2. Offer... 29 Item 4.5.2.1. DTH offer... 29 Item 4.5.2.2. Mobile pay TV offer provided in DVB-T technology... 31 Item 4.5.2.3. Ipla internet television offer... 32 Item 4.5.2.4. Muzo music service offer... 32 Item 4.5.2.5. Internet access offer... 33 Item 4.5.2.6. Mobile telephony offer... 34 Item 4.5.2.7. Bundle services offer... 34 Item 4.5.3. Sales and marketing, customer service and maintenance... 34 Item 4.5.3.1. Marketing... 34 Item 4.5.3.2. Sales... 34 Item 4.5.3.3. Customer Relations and Retention Management... 36 Item 4.5.4. Technology and infrastructure... 37 Item 4.5.4.1. Technology and infrastructure pay-tv... 37 Item 4.5.4.2. Technology and infrastructure Internet access service... 39 Item 4.5.4.3. Technology and infrastructure MVNO... 40 Item 4.6. Broadcasting and television production segment... 40 Item 4.6.1. Market overview... 40 Item 4.6.2. Offer... 43 Item 4.6.2.1. Channels... 43 Item 4.6.2.2. Scheduling... 46 Item 4.6.2.3. Sale of advertising and sponsoring... 48 Item 4.6.3. Sales... 49 Item 4.6.4. Technology and infrastructure... 50 Item 4.7. Development prospects... 51 Item 4.7.1. Retail business segment development prospects... 51 Item 4.7.2. Broadcasting and television production segment development prospects... 52 Item 4.8. Sales markets and dependence on the supplier and client markets... 52 Item 4.9. Other Aspects of Our Business... 52 Item 5. Material agreements... 56 Item 6. Presentation of operating and financial results... 59 Item 6.1. Sources of revenues from services, products, goods and materials sold... 59 Item 6.2. Sources of other operating revenue... 60 Item 6.3. Sources of operating costs... 60 Item 6.4. Sources of other operating costs... 62 Item 6.5. Factors and occurrences that impacted our business and results in 2012... 62 Item 6.6. Trend information... 65 Item 6.7. Major investments... 66 Item 6.8. Review of operating and financial situation... 67 Item 6.8.1. Operating results... 67 6
Item 6.8.2. Presentation of differences between achieved financial results and published forecasts... 70 Item 6.8.3 Review of the financial situation... 71 Item 6.9. Liquidity and capital resources... 84 Item 6.9.1. External sources of funding, financing and indebtedness... 84 Item 6.9.1.1. Information on incurred and terminated credit and loan agreements... 87 Item 6.9.2. Cash flows... 87 Item 6.9.3. Capital expenditures... 88 Item 6.9.4. Contractual Obligations... 88 Item 6.9.5. Off-Balance Sheet Arrangements... 88 Item 6.10. Information on loans granted with particular emphasis on related entities... 89 Item 6.11. Information on granted and received guarantees with particular emphasis on guarantees granted to related Item 6.12. entities... 89 Information on material proceedings at the court, arbitration body or public authorities against the Company or consolidated subsidiaries... 90 Item 6.13. Information on market risks... 90 Item 7. Transactions with related parties... 96 Item 8. Key risk and threat factors... 97 Item 9. Information on shares and shareholders... 116 Item 9.1. Cyfrowy Polsat shares... 116 Item 9.2. Shareholders structure... 117 Item 9.3. Shares quotes... 118 Item 9.4. Analysts coverage and recommendations... 120 Item 10. Dividend policy... 123 Item 11. Shares of Cyfrowy Polsat held by members of the Management Board and the Supervisory Board... 124 Item 12. Remuneration of the Members of the Management Board and the Members of the Supervisory Board... 124 Item 13. Management contracts with members of the management board setting out severance packages payout as a result of their resignation or dismissal from the position without a material cause... 124 Item 14. Agreements with an entity certified to perform an audit of the financial statements... 125 Item 15. Statement on the application of the principles of corporate governance... 125 Item 15.1. Specification of the principles of corporate governance which the issuer is subject to and the location of the set of principles where they are publicly available... 125 Item 15.2. Specification of the principles of corporate governance that the issuer has waived including the reasons for the waiver... 126 Item 15.3. Description of the basic features of the internal control system and the risk management system applied in the Group with respect to the process of preparing financial statements and consolidated financial statements... 127 Item 15.4. Presentation of shareholders holding, directly or indirectly, material bundles of shares... 128 Item 15.5. Presentation of holders of securities with special controlling rights... 129 Item 15.6. Specification of limitations in exercising voting rights... 129 Item 15.7. Specification of ownership rights transfer limitations relating to the Company s securities... 129 Item 15.8. Description of rules regarding appointment and dismissal of the management and their rights, in particular the right to issue or buy back shares... 129 Item 15.9. Description of rules or amending the Articles of Association... 130 Item 15.10. Item 15.11. The Bylaws of the General Shareholders Meeting and its principal rights and description of rights of shareholders and their exercise, in particular the rules resulting from the Bylaws of the General Shareholders Meeting, unless information on that scope results directly from the provisions of law... 130 Personnel composition and changes in the previous business year and description of the functioning of the management, supervisory, or administrative bodies of the Company and its committees.... 132 7
Item 1. Introduction We are a leading media group in Poland, composed of Cyfrowy Polsat the largest in Poland and the fourth largest DTH platform in Europe, and Telewizja Polsat the leading commercial TV broadcaster in Poland offering 20 popular TV channels, including four HD channels. Cyfrowy Polsat platform has over 3.5 million subscribers. It offers access to over 120 Polish-language TV channels, including 36 HD channels. All subscribers of the platform may use PPV / VOD Home Video Rental and TV Online / catch-up TV services, we also provide Multiroom service. The platform has its own set-top-boxes factory. From September 2008, Cyfrowy Polsat offers mobile telephony services in MVNO model and within the cooperation with Polkomtel Sp. z o.o., Plus network operator. From February 2010, Cyfrowy Polsat provides broadband Internet access in mobile HSPA+ technology, and from September 2011 mobile Internet in the latest LTE technology. In June 2012, it introduced mobile television service in DVB-T technology. From May 2008, Cyfrowy Polsat is listed on the Warsaw Stock Exchange. We operate through two business segments: our Retail business segment, comprising pay television services, broadband Internet access services, mobile telephony services as well as production of set-top-boxes and Broadcasting and television production segment. Our two business segments produce revenue streams with distinct characteristics: retail subscription and related revenue (through our Retail business segment), and TV broadcasting advertising revenue (through our Broadcasting and television production segment). Our consolidated revenue from services, products, goods and materials sold in 2012 increased by 17.4% to PLN 2,778,215 from PLN 2,365,925 in 2011. Our net profit amounted to PLN 598,298 compared to PLN 160,190 in the previous year (increase by 273.5%). We sell our services on the entire territory of Poland. Our head offiice are in Warsaw at 4a Łubinowa Street. References to the Company contained in this Management Board s report on the activities of Cyfrowy Polsat S.A. Capital Group apply to Cyfrowy Polsat S.A. and all references to the Capital Group or Polsat Group apply to Cyfrowy Polsat S.A. and its subsidiaries. Expressions such as "we", "us", "our" and similar apply generally to the Group, unless from the context it is clear that they apply to the Company; DTH relates to digital satellite platform services which we provide in Poland from 2001; SD relates to the television signal in the standard definition technology (Standard Definition); HD relates to the television signal in the high definition technology (High Definition); DVR relates to set-top boxes with hard disk used to record television channels (Digital Video Recorder); Family Package starting programming package offered within the pay digital television service including the subscribers to the following packages: Family Package, Family HD Package, Family Max HD Package and premium packages related to them; Mini Package starting programming package offered within the pay digital television service including the subscribers to the following packages: Mini Package, Mini HD Package, Extra Package (Mobile TV); MOBILE TV relates to our pay mobile TV service rendered in DVB-T technology; Ekstra Package relates to the pay programming package offered within our services in DVB-T technology; DVB-T (Digital Video Broadcasting Terrestrial) relates to technology of terrestrial broadcasting of digital television; DTT relates to digital terrestrial television; Our pay digital TV services relate to our paid DTH, mobile and internet television services offered in both prepaid and postpaid model; Subscriber relates to a person who signed an agreement for subscription to pay digital television services and who is obligated, under the terms of agreement, to make payments to access a package or packages of television and radio channels or who has access to such packages within pay digital television services, after making required payments but without having signed such an agreement; ARPU relates to average monthly net revenue per subscriber to whom we rendered services calculated as a sum of net revenue generated by our subscribers from our pay digital television services in the reporting period divided by the average number of subscribers to whom we rendered services in this reporting period; ARPU Family Package and ARPU Mini Package relate to average monthly revenue per subscriber to the Family Package and Mini Package, respectively; Churn relates to the churn rate, defined as the ratio of the number of contracts terminated during a 12-month period to the average number of contracts during such 12-month period. The number of terminated contracts is net of churning subscribers entering into a new contract with us no later than the end of the same 12-month period as well as of subscribers who used to have more than one agreement and terminated one of them to replace it with the commitment to use Multiroom service; Churn Family Package and Churn Mini Package relate to churn rate calculated for the Family Package and Mini Package, respectively; Audience share relates to percentage of television viewers tuned to a particular channel during a given period, expressed as a percentage of the 8
total number of people watching TV, data are presented based on Nielsen Audience Measurement (NAM), 16-49, all day; Advertising market share relates to the share of Cyfrowy Polsat Capital Group revenues from advertising and sponsoring in the total revenues from TV advertising in Poland, the source of our data on the size of the market is Starlink; GRP relates to gross rating point, defined as the number of people watching a particular spot at a specific time, expressed as a percentage within the target group. One GRP, as applied to Poland, is equal to 0.2 million inhabitants in the basic commercial target group (16-49 years old).; Technical reach or Technical Coverage relate to the percentage of television households in Poland which have the technical ability to receive a given channel broadcasted by Telewizja Polsat Sp. z o.o.; VoD or VOD - Home Movie Rental relate in general to our services from the video on demand category, while nvod relates to our service VoD - Home Movie Rental - on TV; PPV relates to pay-per-view, pay access to chosen programming content; Catch-up TV relates to services enabling access to chosen programming content for a certain period of time after the original broadcast on TV channel; Multiroom relates to our service enabling to profit from the same variety of channels simultaneously on two TV-sets in one household within one subscription fee; MVNO relates to mobile virtual network operator services; Internet access services relates to broadband Internet access services; HSPA+ relates to radio data transfer technology in mobile networks (High Speed Packet Access Plus); LTE relates to radio data transfer technology in mobile networks (Long Term Evolution), characterized by much higher data transfer speed, greater capacity and lower network latency; Integrated services relates to a bundle of two or more services from delivered by us pay TV services, mobile telephony services and Internet access services provided under one agreement and one subscription fee; ipla relates to internet platform enabling access to video content operated by entities from Redefine Sp. z o.o. Group; Muzo relates to online music subscription service offered by our subsidiary Redefine Sp. z o.o. Group; CP relates to the company Cyfrowy Polsat S.A.; CPT relates to Cyfrowy Polsat Technology Sp. z o.o.; CPTM relates to Cyfrowy Polsat Trade Marks Sp. z o.o.; Cyfrowy Polsat Finance, CP Finance relate to Cyfrowy Polsat Finance AB (publ), Cyfrowy Polsat subsidiary registered in Sweden; Telewizja Polsat or TV Polsat relates to the company Telewizja Polsat Sp. z o.o.; TV Polsat Group relates to Telewizja Polsat Sp. z o.o. and its consolidated subsidiaries; Redefine Sp. z o.o. Group relates to Redefine Sp. z o.o. and its consolidated subsidiaries: Poszkole.pl Sp. z o.o. and Stat24 Sp. z o.o. (until the merger with Redefine Sp. z o.o.); INFO-TV-FM relates to the company INFO-TV-FM Sp. z o.o.; POLSAT relates to our main FTA channel, available also in digital terrestrial television; Polsat HD relates to our channel on which we broadcast the content of our main channel in HD technology; Polsat Sport relates to our sport channel dedicated to Polish sports and major sports events; Polsat Sport HD relates to our channel on which we broadcast the content of Polsat Sport channel in HD technology (until the end of May 2012, the content of this channel differed from Polsat Sport); Polsat Sport Extra relates to our sport channel broadcasting premium sport events; Polsat Sport Extra HD relates to our channel on which we broadcast the content of Polsat Sport Extra channel in HD technology, the channel is broadcasted since June 2012; Polsat Futbol relates to our sport channel dedicated to football games broadcasted until the end of May 2012; Polsat Sport News relates to our sport channel dedicated to sport news available in digital terrestrial television; Polsat Film relates to our movie channel; Polsat Film HD relates to our channel on which we broadcast the content of Polsat Film channel in HD technology, the channel is broadcasted since November 2012; Polsat Café relates to our lifestyle channel dedicated to women; Polsat Play relates to our lifestyle channel dedicated to men; Polsat2 relates to our channel broadcasting mainly reruns of programs that premiered on our other channels; Polsat News relates to our 24-hour news channel; Polsat Biznes relates to our channel dedicated to the latest news on the economy and financial markets, until February 2013 the channel operated under TV Biznes brand; Polsat Jim Jam relates to children s channel based mainly on programs by Hit Entertainment, the channel is a joint venture launched by TV Polsat and ChelloZone; Polsat Crime & Investigation Network relates to the criminal channel, this channel is a joint project of Telewizja Polsat and British company A+E Networks UK; Polsat Food relates to culinary and lifestyle channel launched by Telewizja Polsat in cooperation with Scripps Networks Interactive in November 2012; Polsat Viasat Explorer relates to a channel dedicated to men, since March 2013 broadcasted based on cooperation between Viasat Broadcasting and Telewizja Polsat; Polsat Viasat Nature relates to a nature channel dedicated to entire family, since March 2013 broadcasted based on cooperation between Viasat Broadcasting and Telewizja Polsat; Polsat Viasat History relates to a history channel since March 2013 broadcasted based on cooperation between Viasat Broadcasting and Telewizja Polsat; Shares relates to the shares of Cyfrowy Polsat S.A., which were introduced to public trading on the Warsaw Stock Exchange on 6 May 2008 and are marked with a code PLCFRPT00013; Senior Facilities relates to senior secured facilities under Senior Facilities Agreement ( SFA ) with a syndicate of banks including Term Facility Loan ( Term Facility ) of PLN 1,400,000,000 (not in thousands) maturing December 31, 2015; and Senior Secured Revolving Facility Loan ( Revolving Facility ) of up to PLN 200,000,000 (not in thousands) maturing December 31, 2015; Bridge Loan relates to senior secured bridge facility of EUR 350,000,000 (not in thousands) with a syndicate of banks, that was fully repaid on May 20, 2011; Senior Notes or Notes relates to 7.125% senior secured notes of EUR 350,000,000 (not in thousands) issued by Cyfrowy Polsat Finance AB on May 20, 2011; Indenture relates to the indenture dated May 20, 2011 governing the 7.125% Senior Notes; PLN or zloty refers to the lawful currency of Poland; USD or dollars refers to the lawful currency of the United States of America; and EUR or euro refers to the single currency of the participating Member States in the Third Stage of European Economic and Monetary Union of the Treaty Establishing the European Community, as amended from time to time. 9
Presentation of financial information Unless otherwise indicated, financial information presented in this Report was prepared pursuant to the International Financial Reporting Standards ( IFRS ) as approved for use in the European Union. All financial data in this document is expressed in thousands unless otherwise indicated, with exception of prices of our programming packages, television channels and telecommunications services. Certain financial information in this Report was adjusted by rounding. As a result, certain numerical figures shown as totals in this Report may not be exact arithmetic aggregations of the figures that precede them. Industry and market data In this Report we set out information relating to our business and the markets in which we operate and in which our competitors operate. The information regarding the market, its size, the market share, the market position, the growth rates and other industry data relating to our business and markets in which we operate consists of data and reports compiled by various third-party entities and our internal estimates. We have obtained market and industry data relating to our business from industry data providers, including: - Eurostat; - European Commission; - Polish Central Statistical Office; - Polish Chamber of Electronic Communication; - Office of Electronic Communications; - Nielsen Audience Measurement; - Starlink; - ZenithOptimedia; - PMR; - Ericsson ConsumerLab; - IAB AdEx; - PwC (Global entertainment and media Outlook: 2012-2016); - TNS; and - Operators functioning on the Polish market. We believe that these industry publications, surveys and forecasts are reliable but we have not independently verified them and cannot guarantee their accuracy or completeness. Moreover, in numerous cases we have made statements in this Report regarding our industry and our position in the industry based on our own experience and our examination of market conditions. We cannot guarantee that any of these assumptions properly reflect our market position. Our internal surveys have not been verified by any independent sources. Forward looking statements This Report contains forward looking statements relating to future expectations regarding our business, financial condition and results of operations. You can find these statements by looking for words such as "may", "will", "expect", "anticipate", "believe", "estimate" and similar words used in this Report. By their nature, forward looking statements are subject to numerous assumptions, risks and uncertainties. Accordingly, actual results may differ materially from those expressed or implied by the forward looking statements. We caution you not to place undue reliance on such statements, which speak only as at the date of this Report. The cautionary statements set out above should be considered in connection with any subsequent written or oral forwardlooking statements that we or persons acting on our behalf may issue. We do not undertake any obligation to review 10
or confirm analysts expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Report. We disclose important risk factors that could cause our actual results to differ materially from our expectations under Item 8 Key Risk and threat factors, Item 6 Presentation of operating and financial results, and elsewhere in this Report. These cautionary statements qualify all forward looking statements attributable to us or persons acting on our behalf. When we indicate that an event, condition or circumstance could or would have an adverse effect on us, we mean to include effects upon our business, financial situation and results of operations. Item 2. Currency presentation and exchange rate information The following tables present - for the periods indicated - certain information regarding the average buying/selling rates as published by the National Bank of Poland ( NBP ), for the zloty, the ( effective NBP exchange rate ), expressed in zloty per dollar and zloty per euro. The exchange rates set out below may differ from the actual exchange rates used in the preparation of our consolidated financial statements and other financial information appearing in this Report. Our inclusion of the exchange rates is not meant to suggest that the zloty amounts actually represent such dollar or euro amounts or that such amounts could have been converted into dollars or euro at any particular rate. Year (zloty per 1.00 dollar) 2008 2009 2010 2011 2012 Exchange rate at end of period... 2.9618 2.8503 2.9641 3.4174 3.0996 Yearly average exchange rate... 2.4092 3.1162 3.0157 2.9634 3.2570 Highest exchange rate during period... 3.1303 3.8978 3.4916 3.5066 3.5777 Lowest exchange rate during period... 2.0220 2.7093 2.7449 2.6458 3.0690 Month (zloty per 1.00 dollar) Highest exchange rate during the month Lowest exchange rate during the month September 2012... 3.3693 3.1131 October 2012... 3.2145 3.1261 November 2012... 3.2945 3.1556 December 2012... 3.1978 3.0690 January 2013... 3.1700 3,0660 February 2013... 3.1841 3.0563 Year (zloty per 1.00 euro) 2008 2009 2010 2011 2012 Exchange rate at end of period... 4.1724 4.1082 3.9603 4.4168 4.0882 Yearly average exchange rate... 3.5166 4.3273 3.9946 4.1198 4.1850 Highest exchange rate during period... 4.1848 4.8999 4.1770 4.5642 4.5135 Lowest exchange rate during period... 3.2026 3.9170 3.8356 3.8403 4.0465 11
Month (zloty per 1.00 euro) Highest exchange rate during the month Lowest exchange rate during the month September 2012... 4.2157 4.0584 October 2012... 4.1543 4.0721 November 2012... 4.1782 4.0968 December 2012... 4.1332 4.0643 January 2013... 4.1969 4.0671 February 2013... 4.2028 4.1515 Item 3. Selected financial data The following tables set forth our selected historical financial data for the 3 and 12 month periods ended December 31, 2012 and December 31, 2011. The historical financial data should be read in conjunction with Item 6. Presentation of operating and financial results and the consolidated financial statements for the fiscal year ended December 31, 2012 (including the notes thereto) and condensed interim consolidated financial statements for 3 and 12 month periods ended December 31, 2012 attached to this Report. We have derived the financial data presented in accordance with IFRS from the audited consolidated financial statements for the fiscal year ended December 31, 2012 and unaudited interim condensed consolidated financial statements for 3 and 12 month periods ended December 31, 2012. Selected financial data from the consolidated profit and loss statement for the periods of three months ended December 31, 2012 and December 31, 2011 have been converted into euro at the rate of PLN 4.1128 per 1 euro, (being the average of exchange rates announced by the NBP in the reporting period i.e. from 1 October to December 31, 2012), from the consolidated profit and loss statement and the consolidated cash flow for the periods of twelve months ended December 31, 2012 and December 31, 2011 have been converted into EURO at the rate of PLN 4.1850 per 1 euro, (being the yearly average exchange rate in 2012, announced by the NBP), from the consolidated balance sheet as at December 31, 2012 and December 31, 2011 have been converted into euro at the rate of PLN 4.0882 per 1 euro (average NBP exchange rate on December 31, 2012). The reader is advised not to view such conversions as a representation that such zloty amounts actually represent such euro amounts, or could be or could have been converted into euro at the rates indicated or at any other rate. It should be noted that the periods of 3 and 12 months ended December 31, 2012 are not comparable to the periods of 3 and 12 months ended December 31, 2011 as shares in Telewizja Polsat Sp. z o.o. were acquired on April 20, 2011, shares in INFO-TV-FM were acquired on January 30, 2012 and shares of entities running ipla platform were acquired on April 2, 2012. 12
Consolidated Income Statement PLN EUR PLN EUR PLN EUR PLN EUR Retail revenue 447,350 108,770 415,523 101,032 1,734,798 414,528 1,594,872 381,092 Advertising and sponsorship revenue 249,800 60,737 256,425 62,348 852,580 203,723 634,204 151,542 Revenue from cable and sattellite operator fees 22,980 5,587 22,885 5,564 93,660 22,380 61,089 14,597 Sale of equipment 7,263 1,766 4,668 1,135 18,770 4,485 16,546 3,954 Other revenue 23,223 5,647 19,728 4,797 78,407 18,735 59,214 14,149 Revenue 750,616 182,507 719,229 174,876 2,778,215 663,851 2,365,925 565,335 Cost of services, products, goods and materials sold (420,018) (102,125) (447,665) (108,847) (1,530,301) (365,663) (1,396,237) (333,629) Selling expenses (77,184) (18,767) (72,068) (17,523) (247,073) (59,038) (243,493) (58,182) General and administrative expenses (65,317) (15,881) (52,082) (12,663) (194,289) (46,425) (159,891) (38,206) Total operating costs (562,519) (136,773) (571,815) (139,033) (1,971,663) (471,126) (1,799,621) (430,017) Other operating income /costs (12,648) (3,075) (3,833) (932) (17,373) (4,151) (6,004) (1,435) Profit from operating activities 175,449 42,659 143,581 34,911 789,179 188,573 560,300 133,883 Gains and losses on investment activities 5,033 1,224 (5,696) (1,385) 14,353 3,430 (15,006) (3,586) Finance costs (43,130) (10,487) (61,553) (14,966) (110,782) (26,471) (355,392) (84,920) Share of the profit of jointly controlled entity accounted for using the equity method 853 207 677 165 2,897 692 2,164 517 Gross profit 138,205 33,604 77,009 18,724 695,647 166,224 192,066 45,894 Income tax (16,581) (4,032) (712) (173) (97,349) (23,261) (31,876) (7,617) Net profit 121,624 29,572 76,297 18,551 598,298 142,962 160,190 38,277 Basic and diluted earnings per share (not in thousands) 0.35 0.08 0.22 0.05 1.72 0.41 0.49 0.12 Weighted average number of issued ordinary and preference shares in PLN Consolidated Cash Flow Statement Net cash from operating activities 781,367 186,707 347,046 82,926 Net cash used in investing activities (133,431) (31,883) (2,426,751) (579,869) Cash flow from/(used in) financing activities (653,347) (156,116) 2,327,429 556,136 Net change in cash and cash equivalents (5,411) (1,293) 247,724 59,193 Other consolidated financial data For the three-month period ended December 31, 2012 2011 For the twelve-month period ended December 31, 2012 2011 348,352,836 348,352,836 348,352,836 324,234,858 Depreciation, amortization and impairment 71,711 17,436 53,531 13,016 243,066 58,080 174,880 41,787 EBITDA 1 247,160 60,095 197,112 47,926 1,032,245 246,654 735,180 175,670 EBITDA margin 32.9% 32.9% 27.4% 27.4% 37.2% 37.2% 31.1% 31.1% Operating margin 23.4% 23.4% 20.0% 20.0% 28.4% 28.4% 23.7% 23.7% Capital expenditures 2 27,474 6,680 23,736 5,771 91,177 21,787 65,674 15,693 1 We define EBITDA as net profit/(loss), as determined in accordance with IFRS, before depreciation and amortization (other than for programming rights), impairment charges and reversals on property, plant and equipment and intangible assets, gains and losses on investment activities, finance costs, income taxes and share of net results of associates. The reconciling item between EBITDA and reported operating profit/ (loss) is depreciation and amortization expense and impairment charges and reversals on property, plant and equipment and intangible assets. We believe EBITDA serves as a useful supplementary financial indicator in measuring the liquidity of media companies. EBITDA is not an IFRS measure and should not be considered as an alternative to IFRS measures of net profit/(loss), as an indicator of operating performance, as a measure of cash flow from operations under IFRS, or as an indicator of liquidity. You should note that EBITDA is not a uniform or standardized measure and the calculation of EBITDA, accordingly, may vary significantly from company to company, and by itself our presentation and calculation of EBITDA may not be comparable to that of other companies. 2 Capital expenditure represents our investment in fixed assets and intangible assets. It does not include expenditure on purchase of reception equipment leased to our subscribers which are reflected in the cash flow from operating activities 13
As at December 31, 2012 December 31, 2011 (in thousands) PLN EUR PLN EUR Consolidated balance sheet Cash and cash equivalents 270,354 66,130 277,534 67,887 Assets 5,561,345 1,360,341 5,348,548 1,308,289 Non-current liabilities 2,026,162 495,612 2,484,080 607,622 Current liabilities 1,066,780 260,941 968,425 236,883 Equity 2,468,403 603,787 1,896,043 463,784 Share capital 13,934 3,408 13,934 3,408 Item 4. Presentation of Cyfrowy Polsat S.A. Capital Group Item 4.1. General information about our Capital Group We are a leading integrated multimedia group in Poland with the number one position in pay TV through Cyfrowy Polsat, and a leading position in TV broadcasting through TV Polsat. Additionally to the offer of pay TV (delivered through satellite, terrestrial and the Internet), we provide to our subscribers broadband Internet and mobile telephony services. We operate through two business segments: our Retail business segment, comprising pay TV, broadband Internet and mobile telephony services and our Broadcasting and television production segment. Our two business segments produce revenue streams with distinct characteristics: retail subscription and related revenue (through our Retail business segment), and TV broadcasting advertising revenue (through our Broadcasting and television production segment). Retail business segment In pay TV, we are the largest pay TV provider in Poland and the fourth largest DTH platform in Europe by number of subscribers. We provide a comprehensive multimedia offer designed to appeal to the entire family. As part of our multi-play offer, we provide to our subscribers DTH, mobile television, broadband Internet in HSPA+ and LTE and mobile telephony services (in MVNO model and from April 2012 based on cooperation with Polkomtel Sp. z o.o., operator of Plus network). As of December 31, 2012 we had 3,566,144 pay digital television subscribers, 150,199 users of broadband Internet service and the number of mobile telephony users amounted to 144,887 *. We offer our subscribers access to over 120 Polish language TV channels, including general entertainment, sports, music, lifestyle, news/information, children s, education and movie channels. We offer all of Poland s main terrestrial channels, including POLSAT, TVP1, TVP2, TVN and TV4, and we are the only DTH operator to offer the combination of Polsat Sport, Eurosport and Polsat Sport Extra, the first, second and fifth most widely viewed sports channels in Poland in 2012 in the commercial group 16-49 (NAM). In addition, we offer our subscribers access to 36 HD channels and also provide VoD/PPV, catch-up TV and Multrioom services. We provide the subscribers to our Mobile TV service with the access to 20 encrypted channels (8 television and 12 radio channels) and to all DTT channels, through various devices (including smartphones, tablets and laptops). We offer set-top boxes, enabling reception of pay-tv services, that in majority are produced in-house. Due to our own production, we have been able to reduce the costs of obtaining set-top boxes. In 2012, over 85% of our sold or leased settop boxes were manufactured in our own factory. From April 2012, we are the owner of internet TV ipla. Ipla is the leader on online video market in Poland both in terms of availability on various devices (computers/laptops, tablets, smartphones, smart TVs, set-top boxes and game consoles) and range of offered content. Ipla has also a leading position in terms of number of users and time spent on watching video * including 137,103 users of our MVNO service and 7,784 our clients who bought Polkomtel s mobile telephony service within cross promotion 14
content by an average user. In two last months of 2012, the number of real users of ipla group (application and website ipla.tv) amounted to 2.3 million (based on Megapanel PBI/Gemius). We sell our services through sales network covering the entire territory of Poland. We distribute our products and services through two main sales channels: retail sales channel and direct sales channel D2D ( door-to-door ). As of December 31, 2012 our sales network included 827 Points of Sales. In addition, from April 2012, within cooperation with Plus network operator we run cross selling of services. Thanks to that our standard offer, as of the end of 2012, was available in additional almost 800 points of sales of Polkomtel Sp. z o.o. network. Broadcasting and television production segment In TV broadcasting, we are one of the two leading private TV groups in Poland in terms of revenue and advertising market share. Our main channel, POLSAT, is number one in terms of audience share with a 15.7% share in 2012. We also broadcast thematic channels, which had a 4.8% combined audience share, and sell advertising on our channels and certain third-party channels. We are a licensed broadcaster of 18 TV channels consisting of general entertainment, sports, news, business, lifestyle, movie and children s channels. Based on data from Starlink, we estimate that we captured a 23.2% share of the approximately PLN 3.7 billion (not in thousands) Polish TV advertising market in 2012. Our television channels include: POLSAT, Polsat HD, Polsat Sport, Polsat Sport Extra, Polsat Sport HD, Polsat Sport Extra HD, Polsat Film, Polsat Film HD, Polsat Café, Polsat Play, Polsat2, Polsat News, Polsat Crime & Investigation Network, Polsat Biznes, Polsat Jim Jam, Polsat Sport News, Polsat Food, Polsat Viasat Explorer, Polsat Viasat Nature and Polsat Viasat History. POLSAT, our main channel, was the first commercial channel in Poland, that received a nationwide analog license and broadcasts 24 hours a day, seven days a week. It is the number one channel in Poland in terms of audience share. POLSAT airs a broad variety of movies (most of them created in the major US studios), lifestyle programs, news and feature programs, Polish and foreign series as well as popular sport events. Our thematic channels are distributed via majority of cable networks in Poland including such operators as UPC, Multimedia and Vectra and via all major satellite platforms, excluding our sport channels to which Cyfrowy Polsat platform has exclusive rights. Polsat Sport is a sports channel broadcasting major sports events in Poland and worldwide which are mostly broadcasted live (volleyball, athletics, football, handball, world class boxing and MMA contests). Polsat Sport Extra is a sport channel broadcasting premium sport events, primarily Formula One and the largest international tennis tournaments such as Wimbledon and handball Champions League. Polsat Sport HD and Polsat Sport Extra HD broadcast the content of both our sports channels in HD standard. Polsat Sport News is our new sport channel dedicated to sport news, it is an FTA channel broadcasted within DTT technology. Polsat Film broadcasts hit movies, top box-office productions and non mainstream movies from a library of major US movie studios. Polsat Film HD is a version of our movie channel offering high definition broadcast. Polsat Café is our channel dedicated to women that focuses on lifestyle, fashion and gossip programs as well as talk-shows. Polsat Play is dedicated to men, its core programming concerns consumer gadgets, the automotive industry, angling and cult series. Polsat2 broadcasts reruns of programs that premiered on our other channels, it is also broadcasted to Polish communities abroad (mainly in USA). Polsat News is a 24-hour news channel broadcasting live and covering primarily news from Poland and key international events. Polsat Crime & Investigation Network is our criminal channel that takes its viewers to the world of crime providing the insight to criminal laboratories, police archives and courtrooms. Polsat Biznes covers the latest news on the economy and financial markets. Polsat Jim Jam is a children s channel based exclusively on programs by Hit Entertainment, the channel is a joint venture launched by TV Polsat and ChelloZone. Polsat Food is a culinary channel, based on the content library of Food Network s, one of the most popular channels on American television. This is a joint venture of TV Polsat and Scripps Network Interactive. Polsat Viasat Explorer is a channel dedicated to men, simple-unusual people, who work hard and have fantastic fun realizing extraordinary dreams. Polsat Viasat Nature is a nature channel targeted to entire family, that aims to accompany wildlife researchers, veterinary doctors and celebrities in their journey developing knowledge on dangerous predators, domestic pets and wild animals from around the world. Polsat Viasat History is a channel offering viewers a journey to the past through high-quality programs, that entertain and aducate at the same time; the content features historical events, that influenced the world s history. Polsat Viasat Explorer, Polsat Viasat Nature and Polsat Viasat History operate based on the cooperation with Viasat Broadcasting. 15
Item 4.2. Organizational structure of the Capital Group The following table presents the companies included in the organizational structure of Cyfrowy Polsat Capital Group as at December 31, 2012 together with the consolidation method: Share in voting rights (%) Entity s registered office Activity 31 December 2012 31 December 2011 Parent Company Cyfrowy Polsat S.A. Subsidiaries Cyfrowy Polsat Trade Marks Sp. z o.o.* Cyfrowy Polsat Finance AB* Telewizja Polsat Sp. z o.o.* RS TV S.A.* Polsat Media Sp. z o.o.* Polsat Futbol Ltd.* Nord License AS* Polsat License Ltd.* Telewizja Polsat Holdings Sp. z o.o.* Media-Biznes Sp. z o.o.* INFO-TV-FM Sp. z o.o.** Redefine Sp. z o.o.*** Poszkole.pl Sp. z o.o.*** Gery.pl Sp. z o.o.*** Frazpc.pl Sp. z o.o.*** Netshare Sp. z o.o*** Łubinowa 4a, Warsaw Łubinowa 4a, Warsaw Stureplan 4C, 4 TR 114 35 Stockholm, Sweden Ostrobramska 77, Warsaw Chorzowska 15, Radom Ostrobramska 77, Warsaw Office 1D 238-246 King St. London W6 0RF, UK Vollsvseien 13B Lysaker, Norway Poststrasse 9 6300 Zug, Switzerland Ostrobramska 77, Warsaw Stanów Zjednoczonych 53, Warsaw Łubinowa 4a, Warsaw Al. Stanów Zjednoczonych 61 A, Warsaw Al. Stanów Zjednoczonych 61 A, Warsaw Al. Stanów Zjednoczonych 61 A, Warsaw Al. Stanów Zjednoczonych 61 A, Warsaw Al. Stanów Zjednoczonych 61 A, Warsaw * consolidation using full consolidation method ** consolidation using full consolidation method from January 30, 2012 *** consolidation using full consolidation method from April 2, 2012 radio, TV and telecommunication activities non-current assets and intellectual property rights management n/a n/a 100% 100% financial transactions 100% 100% Broadcasting and television production 100% 100% terrestrial transmission 100% 100% advertising activities 100% 100% television activities 100% 100% trade of programming licenses trade of programming licenses broadcasting and TV production 100% 100% 100% 100% 100% n/a television activities 100% 100% radio and TV activities 100% n/d web portals activities 100% n/a web portals activities 100% n/a web portals activities 100% n/a web portals activities 100% n/a Electronic media (Internet) advertising broker 100% n/a 16
Investments accounted for under the equity method: Polsat Jim Jam Ltd. Polski Operator Telewizyjny Sp. z o.o.* * the company has suspended operations Share in voting rights (%) Entity s registered office Activity 31 December 2012 31 December 2011 105-109 Salusbury Road London NW6 6RG television activities 50% 50% UK Huculska 6, radio communications and Warsaw radio diffusion 50% 50% Additionally, the following entities were included in these consolidated financial statements: Entity s registered office ul. Chorzowska 3, Karpacka Telewizja Kablowa Sp. z o.o.* Radom * Investment accounted for at cost less any accumulated impairment losses Share in voting rights (%) 31 December 31 December Activity 2012 2011 dormant 85% 85% Changes in the organizational structure of Cyfrowy Polsat Capital Group Finalization of acquisition of INFO-TV-FM Sp. z o.o. On January 30, 2012, 100% shares in the share capital of INFO-TV-FM Sp. z o.o. (INFO-TV-FM) were transferred to the Company following the fulfillment of all conditions precedent included in the acquisition agreement with Narodowy Fundusz Inwestycyjny Magna Polonia S.A. and Evotec Management Limited dated October 28, 2011. The fair value price of the acquisition amounted to PLN 29,313,202.19 (not in thousands). Acquisition of internet television ipla On March 12, 2012, the Company concluded with Bithell Holdings Ltd. agreements concerning the acquisition of shares in the companies running ipla service, the leader in online video distribution in Poland.. The agreements concerned the following shares: 1. 100% shares in Redefine Sp. z o.o. seated in Warsaw ("Redefine") 2. 100% shares in Gery.pl Sp. z o.o. seated in Warsaw (in liquidation) 3. 100% shares in Frazpc.pl Sp. z o.o. seated in Warsaw 4. 100% shares in Netshare Sp. z o.o. seated in Warsaw. The transfer of the legal rights to the acquired shares was effectuated on April 2, 2012. On December 21, 2012, the shareholders meeting of Gery.pl Sp. z o.o. resolved to repeal the process of liquidation of the company effective December 31, 2012. Following the acquisition of the companies abovementioned, we also took control over the subsidiaries of Redefine Sp. z o.o.: Poszkole Sp. z o.o. and Stat24 Sp. z o.o. On November 30, 2012, the merger of Stat24 Sp. z o.o. with Redefine Sp. z o.o. was effected by transferring all the assets of Stat24 Sp. z o.o. to Redefine Sp. z o.o. as the only shareholder of the company. As a result of the merger, Stat24 Sp. z o.o. will be terminated without liquidation. 17
New established company Telewizja Polsat Holdings Sp. z o.o. On May 7, 2012, Telewizja Polsat Holdings Sp. z o.o. was registered by the court. Telewizja Polsat Sp. z o.o. holds 100% shares in the share capital of Telewizja Polsat Holdings Sp. z o.o. On November 27, 2012, Telewizja Polsat Holdings Sp. z o.o. acquired from the mother company Telewizja Polsat Sp. z o.o. 100% shares in Media-Biznes Sp. z o.o. Merger with Cyfrowy Polsat Technology Sp. z o.o. On December 31, 2012 the District Court for the Capital City of Warsaw in Warsaw, XIII Business Division for the National Court Register registered the merger of the Company with Cyfrowy Polsat Technology Sp. z o.o. The merger was effected by: (i) transferring to the Company - as the sole shareholder of CPT - all the assets of CPT by the way of universal succession, and (ii) termination of CPT without liquidation, in accordance with article 492 1 item 1) of the Polish Commercial Companies Code (PCCC). As a result of the merger, Cyfrowy Polsat - in accordance with article 494 1 PCCC assumed all rights and obligations of CPT, effective on the date of the merger. Given that Cyfrowy Polsat held all the shares of CPT, and according to article 515 1 PCCC, the merger was effected without increasing the share capital of the Company. The detailed terms of the merger, were specified in the Merger Plan prepared on October 19, 2012 and published on October 25, 2012 in the Court and Commercial Gazette (Monitor Sądowy i Gospodarczy) no 208, item 13971. Item 4.3. Changes to the principle rules of management of our Company and the Capital Group There were no changes to the principle rules of management of our Company and the Capital Group in the year 2012. Item 4.4. Item 4.4.1. Strategy, market opportunities and comparative advantage of the Capital Group Group strategy Our vision: We will continue to create and provide the most attractive content using the best and latest technologies to deliver high quality multi-play services with the highest levels of customer satisfaction. Our primary objective is to become the number one player in the Polish entertainment market. We intend to achieve this goal both by providing high quality products and services to individual customers, and by acquiring and creating the programming content of superior quality to be subsequently delivered to Polish households. The key elements of our strategy include: Building value of our individual customer base by increasing the number of subscribers, increasing the average revenue per user (ARPU), as well as by maintaining high levels of customer satisfaction Creating value of our Broadcasting and television production segment by keeping audience shares of our channels, upgrading the viewers profile, as well as by widespread distribution of our content Effective management of our cost base by making use of synergy effects achieved across our integrated media group 18
Building value of our individual customer base by increasing the number of subscribers, increasing the average revenue per user (ARPU), as well as by maintaining high levels of customer satisfaction Since the beginning of our operations, we have managed to achieve significant revenue growth in our retail business segment and we plan to further increase our revenues and market share through miscellaneous marketing activities targeted at our existing and future subscribers. Offering packages characterized by the most attractive price to value ratio on the Polish market, we want to attract as many as possible customers to our platform. We intend to profit from changes in the Polish pay-tv market and emerging opportunities related to the evolving needs and expectations of consumers (i.e. growing interest in OTT (over-the-top) services and increasing media consumption on mobile devices) and provide customers with a comprehensive suite of additional services (VOD/PPV, catch-up TV, internet video and music services, Multiroom, Mobile TV). Through the development of our pay-tv offer enriched by complementary products and services, we intend to get both increase in ARPU and increase in satisfaction and loyalty of our subscribers. In addition, we intend to attract to our platform viewers of analog TV, who, along with the ongoing process of digitization, will be forced to take a decision concerning the investment in the equipment suitable to receive digital terrestrial television. Therefore, we offer this group of potential customers high quality set-top-boxes produced in-house along with a package of additional channels at a very attractive price. Concurrently, we are trying to attract the maximum possible number of customers for our mobile broadband Internet access which, according to independent experts, is the fastest growing web access service in Poland. We believe that mobile technology will allow us to offer high quality services in areas inhabited by the majority of our customers which, in combination with the multi-play offer benefits, should help improve the satisfaction of our subscribers and bring further increases in ARPU. In our opinion, the integrated services market in Poland is still poorly developed outside big cities and, therefore, it will grow rapidly in the future. We believe that our extensive offer of package services and the ability to cross-promote additional services delivered through diversified digital entertainment distribution platforms will continue to be our competitive advantage not only in the DTH market but, in the future, throughout the pay television market and it will stand as an important element of our strategy. Creating value of our Broadcasting and television production segment by keeping audience shares of our channels and enhancing the viewers profile The TV channels produced and broadcasted by the Polsat Group have a strong and stable position in the Polish television market and enjoy a high target audience. At present we air 20 Polsat-brand channels addressing most of the target groups among the Polish audience. Our goal is to keep the audience shares at a stable level and consistently improve the viewers profile. We believe that reasonable investments in our programming content as well as wide distribution of our channels will help gradually improve the profile of our audience, which in turn will have a positive impact on the prices of our advertising airtime. The second important element in enhancing the value of our Broadcasting and television production segment is the widest possible distribution of our self-produced channels, within both the FTA and pay-tv models. We believe that by extending the reach of our channels we will be able to attract more audience as well as boost revenues derived from the distribution of our channels by pay-tv operators. Effective management of our cost base by making use of synergy effects achieved across our integrated media group The process of integration of a media group opens up good opportunities to achieve measurable synergy effects and gain significant competitive advantages. For that purpose we have identified several areas of our cost base to be managed at the Group level: (i) cross-promotion and marketing activities, enabling us to promote our program packages, multi-play offer and Polsat Television channels through our various media platforms, including pay TV, VOD, internet television and broadband 19
Internet; (ii) technological synergies, enabling us to use our satellite equipment more efficiently, optimize our hardware and software systems, and benefit from synergies in back-up solutions for the broadcasting center; (iii) benefits on the acquisition of programming content for the entire integrated platform, and strengthening of the bargaining power of our combined businesses; and (iv) synergies associated with our administrative facilities, providing benefits from large-scale operations of our combined businesses and opportunities for sharing of effective solutions. Item 4.4.2. Market opportunities We believe that Poland is an attractive market for our products and services for a number of reasons. We present the key reasons below. Penetration rate of pay television in Poland. We believe that the Polish pay TV market still has some growth potential, related primarily to the transition from analog to digital television and the following need of supplying households with suitable reception equipment. Thanks to our satellite and terrestrial TV transmission and infrastructure-light approach to mobile telephony and broadband Internet, we are able to access less-densely populated and rural areas of Poland at much lower cost than cable TV and Internet providers. Moreover, our programming packages offer the best value-for-money in the Polish DTH market. We believe, that it gives us a chance to attract the significant portion of the potential new clients to our platform. Penetration rate of multi-play services in low-urbanized areas. Integrated services in Poland are provided by cable and telecommunications (Orange Polska) and offered mainly in large and medium-sized cities, which results from the geographical coverage of their infrastructure and the quality of telecommunications infrastructure. According to European Commission ( E-Communications Household Survey, June 2012) the penetration rate of multi-play services in Poland amounts to 28% while in European Union reaches 43%, with penetration rate in Holland and Belgium reaching over 60% (64% and 61% respectively). We believe that as a result of the low saturation of integrated services and poor quality of Internet access services offered in low-urbanized areas, Cyfrowy Polsat may become the leading provider of high quality multi-play services for customers from suburbs, small towns and rural areas of Poland. Growing market for new technologies and equipment and the resultant increase in access to and consumption of audiovisual content. As the market for innovative technologies is growing at a fast pace, the number of mobile devices (notebooks, tablets, smartphones or Smart TV sets) owned by consumers is on the rise as well. This has spurred a sharp increase in access to video content, and hence in video viewership a survey conducted by Ericsson ConsumerLab shows that 67% of respondents (12 thousand people in 12 countries in the research) watch videos on their tablets, smartphones and notebooks. Additionally, nearly 15% of the respondents play video files while moving around the city as passengers in public transportation or cars. Consumers expect service providers to offer them the possibility to watch TV on any screen, anywhere, and at any time. We perceive this group as a prospective customer segment for television services, opening also the opportunity for monetisation of our audiovisual content. Development of advertising market in Poland. Demand for advertising air-time is highly correlated with macro-economic situation. Despite relatively good condition of the Polish economy, world economic downturn and problems in some EU countries have a negative impact on the expenditures on TV advertising in Poland. ZenithOptimedia Media House forecasts that in 2012 total net TV advertising expenditure in Poland shall decline by 5.7%. We believe TV is a highly effective advertising medium, and given the relatively low level of advertising expenditures in Poland as a percentage of GDP and per capita in comparison to other European markets, there is a substantial growth potential for TV advertising in Poland in the long term. It is worth noticing, that despite the growing importance of new media, it is forecasted that watching television will remain an attractive and popular activity, primarily thanks to new technical opportunities, including: increasing number of HD channels and VoD, as well as thanks to growing number of smart-tvs. According to IAB AdEX report Internet advertising market shows a dynamic growth, with the advertising expenditures of PLN 1.9 billion (not in thousands) in 2011, an increase of 22% y-o-y. The expenditures on video advertising segment, in which we generate our revenue, increased in 2011 by 35% and represented 2.5% of the total expenditures on online advertising (increase by 1.7 p.p. compared to 2009). According to our estimates based on PwC forecasts (Global entertainment and media outlook: 2012-2016) the online video advertising will grow by an average 37% (CAGR) in the years 2011-2014. We 20